The effect of mergers on US bank risk in the short run and in the long run

Subject

Finance

Publishing details

Social Sciences Research Network

Authors / Editors

Brealey R; Cooper I; Kaplanis E

Biographies

Publication Year

2017

Abstract

We examine changes in risk following US bank mergers in the period 1981-2014. Using standard event study measurements of short-run changes we show that mergers increased systematic risk but not equity volatility. Using a new approach to measure long-run changes we then find that the changes in risk are consistent with banks maintaining their equity risk in the long run. We measure the loss of diversification of the US bank industry caused by mergers and find it to be 40% of the risk level in 1981. Almost all of this occurred prior to 2004. The results are consistent with a constant risk culture of acquirer banks. They are not consistent with banks taking advantage of the “too-big-to-fail” put option unless they do so only through increasing systematic risk. They may be consistent with the “concentration-fragility” hypothesis.

Keywords

Bank mergers; Bank risk Bank regulation; Too big to fail; Concentration-fragility

Series

Social Sciences Research Network